How to Avoid Gift Tax in Real Estate Transfer
Many people seek to give real estate to family members, especially as part of Medicaid planning. By making a gift, many of our clients can ensure that the state doesn’t take the family home in exchange for paying for nursing home care in old age. But any gift is potentially subject to a federal gift tax. In this blog, we will discuss how to avoid the gift tax in a real estate transfer. To speak to one of our expert lawyers on real estate transfers, contact us today.
When Do You Pay the Gift Tax?
The federal gift tax applies to most gifts between two people other than two spouses. The most common example is giving cash to a child. Under federal law, the person making the gift is responsible for paying the gift tax. The IRS is interested in making sure people don’t avoid paying taxes by giving away their wealth, including their real estate and other property.
The gift tax can come into play if you give real estate to someone else for less than full market value. For example, your home might be worth $300,000. You sell it to someone else for $150,000. Because this sale is for less than the market value, you have made a gift of $150,000. If you gave the home away for $0, then the gift would be for $300,000.
Anyone who makes a gift must file Form 709 with the IRS unless an exclusion applies.
How Much is the Gift Tax?
It depends on the value of the gift. The maximum rate is 40%, and the lowest rate is 18%.
The good news is that there is an annual gift tax exclusion. As of 2023, the annual exclusion is $17,000. If you give someone $17,000 or less, it is excluded—meaning, it’s not even counted as a gift in the eyes of the government. You don’t need to file Form 709 with the IRS. If you and your spouse own property jointly, you can give up to $34,000 and not need to file.
This threshold applies per recipient. So you could give $17,000 to one child and $17,000 to another and not need to file.
There is also a lifetime exemption for gift and estate taxes. As of 2023, the exemption is $12.92 million. This threshold applies to all gifts made while alive or after death, such as through a will. If you never give more than that combined, you will not pay gift tax.
Few of our clients even have $12.92 million in cash, investments, or properties, so very few people will ever end up paying gift taxes. That’s excellent news.
What Steps Do You Take to Avoid Gift Tax on a Real Estate Transfer?
You may want to know how to avoid estate tax and what should you do if you want to transfer real estate and avoid the gift tax? Let’s say you are gifting property to your children for no money in return. It is a true gift.
As explained above, you do not have to pay gift tax unless you have given $12.92 million in gifts during your life. It’s that simple.
However, you might need to report the gift to the IRS using Form 709 if the amount of the gift exceeds $17,000 (or, if you are married, you and your spouse transfer more than $34,000). If you are transferring real estate, odds are it is worth more than these exclusion limits, which means you report the gift. However, you don’t need to pay gift tax unless your giving has exceeded over $12 million.
Ways to Transfer Property Other Than as a Gift
We can also talk with clients about how to transfer the property other than via gifting a house. These alternatives might work, depending on your situation. It’s critical to schedule a meeting to review your specific goals. We offer these alternatives for informational purposes. Some of them might not be appropriate for you.
1. One alternative is to sell the property for market value. If you sell for fair market value, then there is no gift, so there is nothing to report and, obviously, no gift tax. If the fair market value is $300,000, you should receive at least that much.
2. Another alternative is to create a life estate. With this option, you can create joint ownership of the property with someone else, such as your child. You retain the right to stay and use the property while living. You also pay the mortgage and property taxes, along with other expenses. However, at death, the beneficiary on the deed takes over full ownership of the property.
A life estate gives the current owner peace of mind that they can continue to use and live on their property, but it also allows the owner to determine who inherits it after death. Although this is an alternative to a gift, you still might need to pay gift tax.
Help for Large Estates
At Surasky Law, we can help clients regardless of the size of their estate. We have created estate plans for renters as well as people with multiple properties around South Carolina and the United States. If you have substantial assets, then you might exhaust the lifetime gift and estate tax exemption. Is there any way to reduce the tax burden on your family?
One option is to transfer assets into one or more trusts. Some trusts have tax advantages, such as charitable trusts. The asset is owned by the trust, not you, so it isn’t included in your estate. Work closely with your estate planning attorney to find the right trust option to maximize tax savings.
Another option is to purchase life insurance, which might (depending on the circumstances of death) provide a pool of money to pay off some or all estate taxes.
Call Surasky Law Firm
Our law firm realizes that taxes are a murky issue for many. Let us bring clarity to your situation by meeting for a free consultation. We can discuss your goals and how a real estate transfer will help with Medicaid planning or other objectives you have. Call our law firm today.